Working Capital
Working capital is the difference between your current assets (cash, receivables, inventory) and your current liabilities (accounts payable, short-term debt, accrued expenses). It measures whether your business has enough short-term resources to cover its short-term obligations.
Types
Positive Working Capital
Current assets exceed current liabilities. Your business can cover its near-term obligations and has a buffer for unexpected expenses.
Negative Working Capital
Current liabilities exceed current assets. You may struggle to pay suppliers, make payroll, or cover unexpected costs, even if your business is profitable.
Why it matters
Working capital is the financial cushion that keeps a business running day to day. Without enough working capital, even a profitable business can fail, becoming unable to pay suppliers on time, cover payroll, or take on new work that requires upfront costs.
Real-world example
A retail shop has $45,000 in cash, $12,000 in inventory, and $8,000 in outstanding customer payments. Total current assets: $65,000. They owe $28,000 to suppliers and $10,000 in short-term loan payments. Total current liabilities: $38,000. Working capital is $27,000, which is healthy for a business their size.
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